-: Hello, everyone,
let's now discuss equity financing
as a way of raising funds for an organisation.
Now, we'll start off
by looking at an example of two companies here,
and these two entities or these two companies
tried to list at a securities exchange.
Now Guvera tried to list
at the Australian Securities Exchange
and what happened
is Guvera was an online streaming business,
more like Spotify,
and so it had attracted a few investors,
it had raised a few millions of dollars,
and it wanted to attract or raise much more funds,
and so what it did
is it tried to list at the Australian Securities Exchange.
Now, unfortunately, ASX did not approve that listing.
And so subsequently,
Guvera could not find an alternative source of funding
and it subsequently shuts down.
Now Atlassian had a very, very different story.
This company listed at the US Nasdaq
and its IPO was actually oversubscribed.
And so it's a very interesting thing
that one company fails and another one succeeds.
And this is all about having that potential,
showing investors the potential of the business,
the opportunities that exist in the future,
and convincing them to invest in that particular company.
So it's a pretty tricky business.
Now when it comes to equity financing,
you can do that at...
And here, I'm talking about,
say a company that is listing at the primary market,
and this is basically what we refer to as an IPO
so this would be a company
that was not previously listed
and then it tries to list at,
say the Australian Securities Exchange
or another stock exchange.
The intention here is to raise money.
The intention here is to attract investors
who will now become part owners
or owners of the business in exchange for their funds.
Now, there's also what we refer to as a secondary market.
Now, basically, once you have invested in a business,
so in a listed organisation,
you can trade those shares in a secondary market.
And so this is what we refer to
as buying and selling of shares.
Now, this does not raise additional funds
to the company itself.
So for example, if I buy your Tinto shares
in the secondary market,
I'm not raising funds for your Tinto,
I'm just exchanging with an investor
who had previously held shares at Rio Tinto.
Now, the different forms of equity financing,
there's ordinary shares
and this is where you would buy shares in a company
and you'd become a part owner,
but you have to also give part of,
or some of your money to that particular organisation.
There's also venture capital.
Now this tends to happen with startups
that have a very strong growth potential.
And so what would happen
is that would attract venture capitalists
who would invest in the business
in exchange for very, very high return.
Then we also have what we refer to as bonus shares,
and this is where a company
may give its existing shareholders shares
for no consideration
and so that just increases the number of shares
of that particular company.
Now, there are some companies that are listed
and some are not listed.
In this slide here,
we are talking about proprietary companies.
So a proprietary companies,
a company that at least has one member
and also one director
and at least one director must be resident in Australia.
Now such businesses
tend to find it quite hard to raise funds
and so what tends to happen
is they may have access to probably overdrafts,
they may borrow from their mates,
they may borrow from banks
but their borrowing capacity is quite low.
Then we have what we refer to as public companies.
Now, this must have at least 50 shareholders,
and these are non-employees.
Now because of that large size of shareholders,
these companies are able to raise much more funds
than say, proprietary companies.
These companies must also have
at least three directors
and two of these must be in Australia.
So when you talk about raising equity capital,
there are quite a number of ways to do this.
Now, I would like you to go to your study guide
and go through this
but I'll talk about a few of these.
I've talked about the primary issue
where you would have an IPO,
you would...
And this, obviously to have an IPO,
you need to have a prospectus,
and so this prospectus would ideally be sent
to all the potential investors
so that they can read and understand the business
and see whether they feel that they believe in that company
and whether they can invest in that business,
and that's a very serious requirement.
Now, there's also the rights or pro rata issues,
and this one is where additional shares
are given to existing shareholders
for a certain amount of money.
Now, they tend to be discounted
and so that's why they are rights issues,
and so that is only targeted
at shareholders of the company,
not potential shareholders.
And then we have placements.
Now, placements tend to be targeted
at what we'll refer to as sophisticated investors,
and so the beauty with the placements
is companies can raise funds very quickly.
Now, what happens is they target,
it could be institutions,
sophisticated investors,
or what we refer to as experienced investors,
and most of the time,
you'll find the minimum amount to be raised is quite high.
In Australia, it's around $500,000,
that's the minimum.
And so because these shareholders
or these investors are considered to be experienced
or sophisticated,
you will find that there is no need for a prospectus
when it comes to dealing with them.
Now you can go through the others.
Dividend reinvestment plans
are all about reinvesting the dividends
that you receive from a company.
Employees can also access
share ownership schemes in organisations.
So I've worked in companies
where employees can participate in that.
And so after a number of years,
a number of the shares vest.
So it's a very, very good way
of attracting employees into a company
but also retaining them in that particular organisation.
Let's now discuss hybrid instruments.
Now, hybrid instruments
have characteristics of both debt and equity,
and so they may be, for example, convertible notes.
Now, what happens here
is a company may have a convertible note
where it's a debt,
but the holder of that debt has the right
to convert it into shares in the future
if they want to.
And so that's why it has a characteristic
of both debt and equity,
and that's why we refer to that as a hybrid instrument.
Now this tends to be quite attractive,
especially if it's a company
that people would want to invest in
and what shareholders or sorry,
what investors have, what investors do,
whoever has invested in that debt instrument.
After a while, they may decide,
"You know what? I actually want to convert this
rather than to continue adding interest
or rather than to continue the full amount,
the face value being redeemed."
And so those are the examples there,
it could be convertible notes,
it could be preference shares or even exchangeable notes.
Now hybrids are lower risk to investors.
Yeah, like I say, what tends to happen
is it's a debt instrument
but can be converted into shares.
Now banks really like this
because they can classify them as tier one capital
and a Basel III.
So that's a good attraction for the banks.
And the other thing also,
the distributions are also fully franked
so that's very, very attractive to investors as well.
Now, we're talking about equity financing,
and so it's important to,
again, go back to what we discussed in module one,
the global financial crisis, of course,
as well as the European sovereign debt crisis.
Now, with a GFC,
you will recall that the GFC happened,
primarily because of securitization,
and so what happened is there were certain institutions
that had these subprime loans or subprime mortgages,
and what happened is they grouped them into assets
and sold them as paper.
Now, unfortunately, because the underlying mortgages
were not serviceable,
you'll find that there was a lot of default,
and so these all came down, came tumbling down,
so it collapsed,
and so quite a number of companies collapsed,
collapsed in the process as a result of this.
Lehman Brothers was one of the major ones.
And what happens is banks shied away
from giving loans and advances
to companies that were exposed to these securitization
and so, because of that, there was this credit crunch,
and so companies started moving towards equity financing
rather than trying to secure debt
because debt became quite difficult to secure,
only very healthy, high quality companies
could access debt.
Now the Euro sovereign debt crisis was another one,
and this one is a, you will find that in Europe
or in the Euro.
Countries that were really under high debt,
we're forced into these austerity programmes
where they were forced to cut expenditure and wastage,
and so because of that,
those companies really had,
it had a very severe negative impact on those countries,
and some of them ended up having negative growth.
And so, again, because of that,
you find that there was that credit crunch
and so quite a number of companies
preferred trying to attract investors
by telling them about their potential,
the opportunities out there,
and getting that equity finance.
Now you know that with equity finance,
there is no requirement to repay that amount,
and so what tends to happen
is investors will either hold their shares
because of capital appreciation
or because they expect a certain dividend amount,
probably on a periodic basis.
So what's the overall role of the board
when it comes to financial risk management?
Now the board has two roles.
The first one is to set the overall strategy
of that organisation.
So it will determine exactly
where it wants that organisation to go,
but at the same time,
it has to set the risks that it is willing to accept
in pursuit of those business objectives.
And so you will find it is the board of directors
that actually tend to set the boundaries
for the organisation.
So they tell the CFO, they tell the CEO,
"You can't go beyond these limits.
Otherwise, you might find
that a company may be very highly leveraged,"
and so the board will actually set those parameters
and they will also put in place mechanisms in place
to ensure that any red flags can be triggered.
So ideally, you'll find
there'll be a very good treasury policy
or a financial risk management policy
that really articulate what can and cannot be done.
Now, I want you to go to your study guide
and read table 3.4,
so this talks about
the quite a number of financial instruments,
some of which we have mentioned,
promissory notes, overdrafts, and the like.
It would good for you to review that,
very, very important to do so.
So let's now look at funding
for different business structures.
Now this article here talks about
small, medium-sized entities,
and it says that 84% of SMEs
think bank loans are hard to secure,
and this is true.
You know, moms and dads
and proprietary companies and the like,
really have to show,
before they can secure a loan from the bank,
they have to show their projections
and they have to have certain levels of,
certain levels of profits,
and even a history of profits,
and sometimes that's quite challenging.
And so you will find with SMEs,
it's very, very difficult for them to convince banks,
to actually give them loans and borrowings.
And so this article says,
only 16% of SMEs think it's easy to secure a loan
through a bank.
So what are the different business structures and funding?
So we have, first of all,
the sole traders and partnerships,
so sole traders is those guys out there
trying to do a business on their own,
they could be tradies and the like.
Now, obviously, as I said,
it's very difficult for them to source capital,
and you'll find what they tend to do
is sell, maybe a private vehicle,
approach their parents for some cash,
get some external loan from friends,
sometimes they may get a line of credit
from a bank and the like
but it's really, really difficult for them.
And then we have private companies on SMEs.
Now because these companies have a highest scale
or they are at a much larger scale
than a sole trader or a partnership,
they tend to attract more capital
than sole traders and partnerships.
So, as an example,
you will find that if the business is successful,
it's a private company and it's successful,
it's business model is working,
and it looks like it's scalable.
Then what happens is it can approach,
say venture capitalists,
show what its business model is
and show what its growth potential is,
and many times if those numbers hold,
then this venture capitalists
will invest in that business.
Banks will also be happy to invest in such businesses
if they can see a history of making profits
and they can see that the future is also bright.
We then have public companies,
and here is where we are talking about
companies that maybe unlisted initially
and then they go through an IPO and become listed.
Now, some of these companies that are public
may also be unlisted,
but they also give shares to investors.
Now, these shares don't have a secondary market
so you can't, there's no market to exchange
this shareholding or these shares of this company.
And so when you buy shares in a public company
that is not listed,
you have to look for another investor yourself
who is actually interested in buying that share
should you want to dispose it off.
Now when it comes to charitable institutions
and companies like that,
they tend to be not-for-profit and limited by guarantee.
And so with this ones,
what will happen is they are limited to the nominal amount
that was contributed when these organisations were set up,
and so beyond that, you cannot, for example,
go to the directors for their personal assets
in case they owe more than what was contributed initially.
And so that's why
they're referred to as they are limited by that guarantee.
So with that,
we have looked at sources of funds,
we've talked about equity financing,
we've talked about the implication of GFC
and how that resulted in the credit crunch
and why equity financing became attractive once again,
we talked about sole traders and partnerships,
and we've also discussed private companies on SMEs.
And I've also mentioned
that it's very important for you to review
that summary of financial instruments,
most of which we had discussed,
such as promissory notes, overdrafts and the like.
That brings us to the end of this webinar.
Thank you.